Field Experiments in Rural Finance: An Example from Tamil Nadu, India

This paper provides an extensive introduction to randomized controlled trials (RCTs) as an analytical tool to investigate social and business phenomena, to provide scientifically founded answers to policy issues. The paper describes the advantage of using RCTs in terms of:

• Greater precision as compared to traditional statistical techniques;
• The capacity to simultaneously test various hypotheses without being affected by psychological biases.

The authors discuss the kind of questions that can be answered by RCTs and present a six-step methodology for implementation in the specific field of rural finance and agriculture. In the second half of the paper the authors present an empirical experiment on relaxing borrowing constraints, conducted in the Indian State of Tamil Nadu, in several rural branches of one of India?s largest private banks. The initial experiment:

• Consisted of 390 observations across all branches, and was in the context of jewelry loans, one of the bank's product offerings;
• It focused on measuring the effect of increased credit limits on default rates and various social indicators.

The authors conclude that the conducted experiment shows the usefulness of employing RCTs to:

• Inform the bank whether they can safely increase credit limits;
• Say something about the prevalence of credit constraints in the customers' understanding borrowing patterns.